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Making Markets Work and Work for the Poor

Eleni Gabre-Madhin

IFPRI

May 23, 2006

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Agenda

Market impacts on the poor: the jury is out Making markets work: Challenges and

directions Making markets work for the poor:

addressing the needs of the poor Promising new directions

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The core challenge: achieving a market-led agricultural transformation Historically unique: “In Asia, we simply did not

have to worry about the market.” Dr. Norman Borlaug

In addition to market liberalization, the forces of “globalization” have led to dramatic changes in the global agro-food system key challenges faced:

the role of the smallholder the fate of traditional agriculture the evolution of traditional markets the dynamics between private and public sector the balance of power in the global market arena

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How Markets Matter

TRANSACTION COSTS

INFRASTRUCTURERoad networkTelecommunicationsMarket facilitiesStorage and processingLogistics/handling

INSTITUTIONSInformationCoordinationContractsRulesEnforcement

INCENTIVESPolicy reformTax and tariffsInvestment climate

SMALLHOLDER PRODUCER

INPUTS/FINANCE/SERVICES

DELIVERY

MARKET ACCESS

COORDINATION

ENFORCEMENT

INFORMATION

Increased Technological Intensity Increased Commercialization of Output

Modernization of Agriculture; Improved Producer Livelihood

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The Market Problem

Market liberalization and the unleashing of market forces has not lead to expected outcomes.

Why? Because getting prices right, while necessary, is not enough.

Why? Markets are embedded in human interactionHumans are boundedly rational, complex, and shaped

by culture, history, and social forcesInteraction is costly to coordinate Interaction requires enforcement

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Elements of market failure

Transaction costs are high: Little market information No product standards Limited market coordination

Contract risk is high and trade is largely personalized

Market finance is lacking Weak private sector Markets are thin and weakly integrated Markets are risky

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Transaction costs are high

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

US

$ /

to

n

Addis Ababa US (CIF Djibouti) Import parity (Addis) Export parity (CIF regional port)

Source: Puetz, 2003

Maize import-export parity band

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Price volatility is high

c) Addis Ababa and Dessie

0

10

20

30

40

50

1996

1997

1998

1999

2000

2001

2002

Year

Bir

r/ 1

00 K

g

TCSPD

d) Addis Ababa and Dire Dawa

0102030405060708090

1996

1997

1998

1999

2000

2001

2002

YearB

irr/

100

Kg

TCSPD

Negassa, 2003

Parity price analysis - wheat

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Markets are weakly integrated

Wholesale Maize Prices

0

50

100

150

200

250

Birr

per

qui

ntal

(nom

inal

)

DireDawa Addis Ababa AVERAGE Producing areas

29% May 00-01

62% May 00-01

Maize

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Getting Markets Right: The New Agenda Reduce marketing costs (transport; handling)

Reduce transaction costs (search, information,

enforcement, ..)

Increase finance

Increase market integration (responsiveness)

Increase competition

Increase participation

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The 3 I’s of Market DevelopmentINCENTIVES

INFRASTRUCTURE INSTITUTIONS

Policy reformTax and Investment climateTrade PolicyMacro-Economy

Coordination mechanisms: exchanges value chains contracts Regulations and LawsDispute settlement Grades and standards Industry AssociationsFarmer Associations

TelecomsRoads/TransportStorageLogistics/HandlingResearchExtensionInformation systems

PRIVATESECTOR

FARMERSTRADING FIRMSPROCESSORSTRANSPORTERSSTORERS

PUBLIC SECTOR

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Pro-poor markets? Specific challenges

DIMENSIONS OF POVERTY

Spatial dispersion Asset poverty: financial, physical,

human, social, natural capital Small scale Vulnerability Weak social participation and lack of

power/voice

Market development goes beyond improved market access

Higher transaction costs

Higher risk

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Challenges of Market Development A holistic approach that addresses “3 I’s of

market development”: Incentives, Infrastructure, Institutions

A concerted focus on specific challenges of poverty space, assets, scale, resources, power

Making markets work and work for the poor

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Making markets work for the poor Size and scale matters Location is crucial Land quality and resource base is important Public good investments in asset creation are

essential Vulnerability matters Social capital is key: both bridging and bonding

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Overcoming household level transaction costs

Vertical coordination (bridging) contract farming improves chain-efficiency depends on characteristics of actors

Horizontal coordination (bonding) cooperatives/ass’ns decreases search, negotiating and monitoring costs although coordination in itself can be costly

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HouseholdVulnerabilityto Risk

House-hold

Assets

INSTITUTIONSINFRASTRUCTUREPOLICYNATURAL DEMOGRAPHIC

HHD TRANSCOSTS

Farming systemDiversificationIntensificationResource use

Wage employmentNon-farm activityMigrationTransfers

MARKET PARTICIPATIONmi > 0 : sellermi < 0 : buyermi = 0 : autarky

Food securityIncome

Well beingCons’n smoothing

HHD TRANSCOSTS

Household Conditions

Contextual Factors Livelihood Strategies

Smallholder Market Participation in LFA

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Household market participation regimes

Autarky: S = 0, P=0 Seller only: m>0: S>0, P=0 Buyer only: m>0: S=0, P>0 Net seller: m>0: S-P>0 Net buyer: m>0: S-P <0

Explaining paradoxes:Why do producers undertake “inverse arbitrage”? ie. Sell low and buy high?

Is this due to missing credit market? High storage costs? Weak assets?

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Smallholder Households’ Position in the Maize Market

0

10

20

30

40

50

60

Mozambique Zambia Kenya

sell onlybuy onlybothneither

perc

en

t

Jayne et al, 2005

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Impact of assets and size on market participation

2913603732.8762,566Households not selling maize

514135745413.9234,988Rest of maize sellers

2,2828236901,5586.023,680Top 50% of maize sales

Total hh income (US$)

Gr. Rev., crop sales

(US$)

Gr. Rev., maize sales

(US$)

Asset values

(US$)

Farm size (ha)

N=

Jayne et al, 2005

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The second revolution? Promising directions in market development Commodity exchanges have recently emerged

throughout the developing world, particularly Asia the share of Western exchanges has dropped to half its market share since 1990, especially post 2000

New commodity exchanges are driven by information technology and promise to revolutionize agriculture in the same way that the Green Revolution did

Based on a new partnership between the private and the public in the new arena created by market liberalization.

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Emerging exchanges growth

Dalian Commodity Exchange now 2nd in the world (overtaken Chicago B of Trade) Indian exchanges growing by 250% annually since 2003

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Explosive growth and reach to the poor in India

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Technology driven approach in India Vast commodities market: 7500 small localized markets (known as

‘Mandies') In 2002, the Government of India identified the agricultural sector as a

thrust area for modernization and began an initiative to commission an effective nationwide commodity trading infrastructure envisioned a state-of-the-art nationwide commodities exchange

3 new exchanges started Nov 2003: Multi Commodity Exchange, National Commodities and Derivatives Exchange, and National Multi-commodities Exchange

System of linking rural markets using low-cost VSAT technology over 4800 trading terminals in the rural market towns, enabling wide access to the national exchange

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Impact on smallholder livelihoods Risk management: Farmers can lock in a

price before sowing Information: Farmers are better able to

negotiate prices given market transparency Transaction costs: Farmers are not restricted

or captive to local market Space no longer matters with technology

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In sum To make markets work for the poor, market

development efforts must go beyond the 3 I’s of market devt

Interventions must address assets, vulnerability, location, size and collective action

Market development efforts must be integrated and holistic

Promising new directions: commodity exchanges